Different investors will have different criteria for what makes a great stock to own. However, a properly diversified portfolio should have variety of stocks that offer a variety of benefits -- whether it's a top growth stock, top value stock, top dividend stock, and so on.
Each of these stocks is exceptional in some way, either because its growth opportunities are incredibly compelling, or it's highly undervalued, or it's rock solid. MercadoLibre (MELI -1.79%) is my top stock to buy today because it's a no-brainer for high growth, and it's still 40% off its highs.
Bolstering its moat
MercadoLibre is an e-commerce powerhouse headquartered in Argentina that's similar to Amazon. However, it has built out an impressive fintech segment that's growing even faster than its core e-commerce business.
It has captured a large portion of market share in the 18 Latin American countries in which it operates, so much so that it would be difficult for any competitor to challenge it. It has posted almost astonishing growth throughout the beginning of the pandemic, surpassing 100% sales growth for five consecutive quarters, and it continues to grow on top of that with consistent high-double-digit sales growth.
That continued throughout 2022, and it ended the year with a 56% year-over-year sales increase in the fourth quarter. Gross merchandise volume (GMV) kept its momentum, up 35% over last year, and total payment volume (TPV) was up 80%.
Management is focused on innovation and improvement, and the new products and services it rolls out protect its business and generate strong consumer loyalty. Its sweet spot lies at the intersection of assortment, price, and service, and doing each of these things a little better lead to more scale and, ultimately, dominance.
Some examples: As it recruits more sellers to the Mercado Envios program, which is its own distribution network, it's able to offer more same-day and next-day deliveries. It also recently completed a technology upgrade in the fintech app, with more user-friendly options such as digital transfers for investments.
Scaling leads to profits and cash
MercadoLibre hasn't been consistently profitable as it invests in growing its business. It's not so young anymore, but it's still in a high-growth phase. It posted $165 million in net income in the fourth quarter after a $46 million loss last year, and $482 million for the full year, a 480% increase over 2021.
It also consistently generates positive free cash flow, and that's been growing.
MELI Free Cash Flow data by YCharts
An open growth runway
While growth is still comfortable across its segments, MercadoLibre is looking for new revenue generation routes as well. Its advertising business is rapidly growing, and management sees strong upside here. It's also expanding its fintech capabilities, recently launching several credit products to offer a more complete variety of financial services.
Within fintech, it's adding new products and services all the time, such as digital transfers and new insurance products.
There are also Latin American markets it hasn't entered yet, and some of its markets that are still high growth, including its headquarters of Argentina, where GMV increased 83% year over year in the fourth quarter.
What are its challenges?
A company this size is bound to face its share of challenges, even though they pale in comparison to the successes and opportunities. It's seeing economic pressure, although the impact has been less than in other companies. The fintech take rate, for example, which is the amount of money it gets from processing payments, was lower than last year because credit revenue decreased as a percentage of TPV.
The credit business is highly susceptible to economic volatility, which could adversely affect it in a high interest rate environment. In the current environment, it moved quickly to improve its credit assessment programs when interest rates began to rise, leading to continued improvements in interest margin after losses in the fourth quarter.
It's also fending off challengers such as Sea Limited, which has made progress in Brazil, the largest Latin American market. However, because it has developed a powerful moat, other challengers aren't posing a strong threat at this time.
Its stock is on the rise
MercadoLibre stock is now about flat over the past year and up more than 40% year to date. Yets, its shares ares trading at a price-to-sales ratio of less than 6, about half its three-year average, while sales have been soaring.
MELI PS Ratio data by YCharts
That looks like an excellent entry point for investors who have been on the fence. Considering its potential, profitability, and attractive price, MercadoLibre is a no-brainer buy.
